Lack of real-life education

Well, I think there are several levels to the personal finance subject. I also think that most people dive in to the deepest levels (technical investment topics) without getting the basic philosopy stuff down first.

In my opinion, the best "life philosophy" about personal finances I've ever heard is by Jim Rohn. I like his tapes, though I realize that others don't care for his style. His personal financial strategy is really simple:

1. Live on 70% of your income. That means you should pay all of your bills and expenses out of 70% of your income. This is easy to do immediately after school, since most people enjoy a big bump in pay right after graduation. Trust me, it will be *MUCH* more difficult to get down to 70% even as little as one year later.

2. Of the remaining 30%, allocate it as follows:

The first third goes to savings. After you have accumulated 6-9 (or even 12) months worth of living expenses (the other 70%), then you can go and read up on how best to invest the rest of it. First, get yourself a big healthy chunk of CASH (money market fund is great) for a rainy day (like losing your job, or whatever). Since you are living off of 70% of your income, it will take you 7 months to save up a single month's worth of expenses (not including the return on the savings). That's OK. Saving is a long-term strategy.

The second 10%, according to Rohn, should be viewed as *capital*. That means that it is to be saved and used to participate in the capitalist system as the capital of an enterprise. It doesn't matter what the enterprise is. The point is that this portion of the money should be viewed as energy to create more money. Elsewhere I have heard it said that poor people see money as means to immediate gratification, middle-class people see money as means to delayed gratification (saving for things), where the wealthy see money as a means to make money -- that means as *capital*. A relatively small amount of capital can get you going on all kinds of things, from your own business to investment real estate. Rohn's point is that the money should be set aside specifically to be used as capital.

The final 10% should be used to give back to the community. This is pretty controversial with a lot of people, but I think it makes a ton of sense. Now, maybe 10% isn't the right number, but the idea of *investing* back into the community in some way is a fine idea, in my opinion. Rohn says this is also something that is easiest to start early, and I agree. We're not necessarily talking about giving to a church, though many people do that. It doesn't matter. The point is that one begins to see their life as part of a greater community and that their success matters more than their own self interest. This is a whole other topic...

If you can take the 30% of your *gross* out of your *net*, then that's even better. Any kind of tax-deferred funds like 401k's or IRAs are such a great deal that I believe everyone should participate up to the annual maximum amount, if possible, but that doesn't take the place of the 3 catagories, above. On the other hand, if you've already got the first 10% totally squared away, I suppose a 401k or some other tax-deferred mechanism is a great way to keep going on the first 10% catagory.

I agree 100% that it is critical to have some CASH saved away. I think it is more important than eliminating debt or starting a 401k. Those things are really close seconds, IMHO.

I think a person could do a lot worse than checking out Jim Rohn, especially if they are just "starting out".

FWIW,

Jim

Big thanks for any pointers you guys have.


I don't know if any of this will be useful or even do-able... but a few guidelines I live by are:

1) Every dime I spend is done through my credit card. This way I have a monthly summary showing exactly where my money went. $40 cash in my wallet will last me literally years purchasing the very rare item that I can't put on my card.

2) I only have one credit card, and the balance is paid in full every month. I have never paid interest on a credit card in my life, because...

3) I never, ever buy anything with my credit card that I could not have written a check or paid cash for instead. The credit card is NOT a means to borrow money I don't have; it is an accounting convenience.

4) This is the biggie. If I had access to a time machine and could somehow transport myself back 40 years, I would bring a gun and hold it to my 20-year-old self's head and absolutely make me start a 401k program. (Hmmm... was there a 401k back then?) Prioritize that 401k contribution ahead of food, drink, cars, and sex. Figure out the maximum I could possibly afford to put into it -- then put in twice that amount. I would be a multi-millionaire today had I done that.

I guess my philosophy comes down to six words:

Don't spend money you don't have.

tanstaafl.

I have to agree. Of course I am exactly the opposite of fiscally responsible, so it's probably hypocritical of me to do so.

Admitting your problem is the first step to recovery

Step 2 holds no interest for me.

You are hardly alone. I consider myself fortunate to have grown up in a family where my parents taught me this stuff from an early age. As soon as I was old enough to get an allowance, the answer to "Mom, can I have this?" was "Save your money." On account of having to pay tithing (10% of increase, i.e. income less living expenses) at church, stewardship was pretty important. I was taught to save receipts, balance a checkbook, budget for expenditures, etc.

And sadly, I ignore most of that now. However, the big things I learned are:

1) Don't spend money you don't have. If you can't pay immediately with cash, don't buy it on credit.

2) Save money for the rough times (not to mention retirement). The more the better. The earlier the better.

3) Don't ignore quality of life, but at the same time, there's no need to be a fiscal hedonist.

Honestly, that's about the gist of it -- the devil is in the details, and boy, are there a heck of a lot of details.

One of the better "intro to personal finance" books I've read (back in high school) is The Wealthy Barber. It was incredibly easy to read and understand, and gave simple advice.

I'd follow that up with the Motley Fool books. Again, these are all simple, easy to read books. They go a bit further than Wealthy Barber, shies away from all the financial mumbo-jumbo that turns off most people from looking at finances when possible, and introduces it gently when necessary. In addition to their books, they also have a huge website, with everything from free financial articles, stock quotes and charts, to user forums (sadly non-free). It's probably the most popular financial website on the Internet, and is usually the first place I look when I have questions about things like stocks, life insurance, etc.

If you want to move beyond the Motley Fool, a great deal of what they base their material on is the philosophy from The Intelligent Investor. This is the advice that Warren Buffett followed in his investing. I have yet to read this (it's on my nightstand), but as the title suggests, it leaves the personal finance stuff to other people, and deals soley with how to invest that nest-egg wisely.

"And" indicates a decimal point. End of story.

Hmm. Looking it up, it seems that this is a British/American difference.